Avoid These Mistakes So You Can Get Paid

October 25, 2011

The single most important reason to be in business. (Really. You know it’s true.)

One of the questions I regularly receive from my clients is some variation on the theme of them getting paid by their clients. People are curious about this from both an accounting and a philosophical perspective, as in:

“How do I write off bad debt?”

Or, more often: “What do I *DO* with clients who won’t pay?”

And occasionally:
“I can’t pay you until the owner of Rita’s Retail Repository pays me for the hours and hours I spent turning her ancient frame-based website into a gold-spinning e-commerce machine.”

Like my clients and most small business owners, I too have direct experience with payment issues, as this kinda-sorta-made-up email attests:

TO: Amateur AccountantFROM: Confused ClientI’ve just received your bill, and it’s a little more than I was expecting. Didn’t you say you were going to do my taxes for $500 this year? Thanks, Client

TO: Confused ClientFROM: Amateur AccountantHi there, Yes, that’s right, $500 for your S-corporation’s income tax return. I also charged my normal rate of $250 to prepare your personal income tax return, which brings the total to $750 as reflected on my bill. I’m so sorry if I wasn’t clear enough in our earlier conversation. Best regards, Your Newbie CPA

Oops. I violated Rule #1 of Getting Paid: I didn’t properly clarify the terms of our transaction. I assumed that the client understood and remembered verbatim our somewhat casual chit-chat about fees. This was one of my very first tax clients (and a friend), and I felt horrified to be off to what I perceived as such a bad start.

So without further ado, here follows a list of four things NOT to do if you want to get paid.

1) Don’t properly clarify expectations.

In my industry, it’s common to use “engagement letters” when working with clients — which I obviously failed to do in this case. These letters are usually long and drawn out, but they do clearly identify in writing the terms, conditions, scope of services, and fees for the engagement. It’s a good practice to use these types of documents, and it applies across all industries.

To better ensure that you’ll get paid, provide your client with a project quote, outline, or contract. It’s doesn’t have to be anything fancy. It can be a simple Word document. Negotiate as many terms as possible in advance. Be specific about your fees. It’s especially important to clarify expectations in new situations, such as when working with a new client.

2) Don’t work with your “right people.”

I’m a big believer in client filtering so that I’m most likely working with my “right people.” I realize it’s hard to be selective when you’re just starting your business, and you’re willing to work with any ol’ body who walks through the door. But that isn’t the best long-term strategy. You’ll be exhausted and you’ll lose your focus on whom you really want to serve.

For example, I prefer to communicate with people by email (or Twitter) and do all my work electronically. If someone wants to regularly talk on the phone with me (GASP!), it’s possible they’re not my “right people.” I’m not a big phone-talker. (Plus I like to have records of all my correspondence.)

The “right people” for my business are curious, interested in new ideas, and willing to follow my instructions. They’re generally small business owners or solopreneurs, and at least moderately technologically savvy. They may not share my interests or opinions, but they respect my time, my knowledge & skills, and the services I provide.

As small business owners, figuring out our “right people” (also known in biz-parlance as “defining our target market”) helps us to do what we do best for the people who want and need it most — which usually makes those clients happy to pay us.

3) Don’t make it easy for clients to pay you.

This is a no-brainer: The easier you make it for people to pay you, the more likely they actually will.

Don’t just wait for checks to arrive in the mail. Be able to receive payment by PayPal or credit card. You can also use this handy gadget on your (non-Blackberry, sigh) mobile device.

And by the way, those PayPal or merchant account fees: They’re tax deductible business expenses.

4) Don’t kick deadbeats to the curb quickly enough.

One of my clients is a self-employed Licensed Professional Counselor, or LPC. Like a lot of small business owners these days, she sometimes works with people who are under financial duress. So she makes arrangements for them to postpone payments or make payments in installments. I’ve been told by her that this strategy often proves unwise and untenable for both parties.

As soon as someone begins to demonstrate that paying your bill is not gonna happen for whatever reason, you must immediately begin the process of “kicking them to curb” with kindness. Offer referrals to other service providers, and don’t burn bridges. But quickly end the relationship.

And then close the chapter in your own mind. The larger an unpaid balance becomes or the more time that passes, the more likely that anger, resentment, and all sorts of psychological confusion will ensue. You may find yourself asking, “Am I not good enough? Am I being unfair to this person who doesn’t have money right now? Am I greedy?”

No. This is not a charity. This is your business. It’s OK to fire clients.

Bonus Note

Some people just won’t pay you because they’re slack, broke, quarrelsome by nature, disorganized, or some combination thereof. That’s just the normal cost of doing business. But if A LOT of your clients aren’t paying your invoices, then maybe it’s an interpersonal thing with you. Maybe you’re a crappy vendor. Maybe you haven’t honestly had the Year-End Value Chat with yourself. Maybe you’re quarrelsome by nature.

Sometimes it isn’t the client’s issue. Sometimes we have to look in the mirror at ourselves and our own practices.

P.S. The particular client referenced in the email above did pay me, and remains one of my favorite clients. She could have balked, or kicked me to the curb. Instead I had the opportunity to learn a valuable lesson.

What’s been your experience with non-paying clients? How do you deal with them? Is there anything you’d add to this list? Please leave a thought in the comments.